It’s every committee’s call – the only way for fuel subsidies in India is the way out;
can the Indian government bite the bullet at the risk of losing voters and Parliamentary support?18/03/2010

In the Union Budget for 2010-11, Finance Minister Pranab Mukherjee has shown some gumption in tackling the issue of subsidies. Much to the chagrin of oil companies, the minister has reiterated his government’s support for cash subsidy to these companies as opposed to use of oil bonds. Consequent to restoration of basic duty of 5% on crude petroleum; 7.5% on diesel and petrol and 10% on other refined products, prices of fuels are back on the upward path. Predictably, opposition members protested their hearts out.

Politicians logically want to keep telling people the version of the truth that they want to hear. Most of us perhaps know, but rarely appreciate the fact that fuel subsidy is a slow killer hurting the Indian economy internally. As they lead to gigantic losses, government shares it with state-run PSUs from its budget, which otherwise could have been utilized in developmental projects. And as the subsidies grow bigger, the government continues to commit more and more funds from developmental projects towards the subsidies. The Financial Times estimated the fuel subsidy touching a huge $57.8 billion in the 2008 fiscal year. The budget allocation for public infrastructure in the last year was merely $4.43 billion (Rs. 20,450 crore). Imagine if the same subsidy amount was invested in revamping the public transport, people would automatically switch towards alternative modes of transport like trains, buses, et al, which would invariably reduce traffic jams, pollutions and accidents. More importantly, India would have achieved world class public transport system.

Globally, while developing countries keep fuel prices low for consumers, developed countries primarily give markets the freedom to decide prices. Fuel subsidy costs Malaysia around $14.74 billion a year, a third of the government expenditure. Likewise, it costs Indonesia a whopping $4.89 billion a year. The Egyptian government paid fuel subsidy worth a staggering $11.21 billion in 2007. And subsidy is causing a damage of around $19 billion every year to the Mexican government.

Although justified in part, subsidies are self defeating in India for many reasons. The large-scale misuse of fuel subsidies on petroleum products amounting to over Rs.1.03 trillion as per the Parikh committee is too big for the country to bear. Moreover, highly subsidized LPG is illegally exploited in non-domestic use (running cars) by the affluent class. A whopping Rs.52,000 crore subsidy on diesel in 2008-09 only helps the luxury car owners, cinema halls, shopping malls, luxury hospitals and telecom towers. Similarly, over Rs.5,200 crore subsidy on petrol every year is only helping the top bracket. With respect to kerosene and LPG, holes in the system need to be plugged. A scrutiny reveals that while the current market price of kerosene should be at Rs 26.37 a litre, it is sold at around Rs.9 a litre (cheaper than mineral water). This has led to a fuel mafia and replaced diesel with kerosene, which not only reduces the efficiency of engines but also creates heavy pollution. A NCAER study revealed that 40-50% kerosene
sold under PDS is diverted and sold in the black market and the poor people buy kerosene at over Rs.22. It further causes smuggling of kerosene to Bangladesh and Nepal. This hurts public sector oil companies too, who had to bear over Rs.30,000 crore as burden for 2009.

In spite of the repeated recommendations made by the all three Committees including the Kirith Parikh, C.Rangarajan and Chaturvedi, the government is still reluctant to go the whole hog. Even if kerosene and LPG subsidies are retained (due to BPL concerns), diesel and petrol should be left free for the markets. If the communist China can hike fuel price by five times in 2009, it’s high time India does too. The current budget has taken some steps. One more please!